In my last post I noted that the “supply or demand shock” framing for COVID-19 could be useful, but hid important elements – namely even when there is a real shock if we aren’t noticing rising factor prices (eg wages) there is a demand element.
Given current concerns most focus is on the question of how to deal with the consequences of a disaster now – in a way that doesn’t lower productive capacity in the future. This is a good frame, and the New Zealand discussion has been strong relative to a lot of other countries.
However, even though a lot of the stores are closed now “demand” management is not just about that future – it needs to occur now as well. As a result, monetary policy does have a role.Read more